New Economist

Austan Goolsbee

The September/October 2008 edition of the MIT Technology Review has a feature by Mark Williams on Obama's senior economic advisor, Austan Goolsbee: Obama's Geek Economist No earth shattering insights, but another reminder of just how Chicago-ist an Obama presidency could be.

Bernanke's official dealings

Despite their professed independence, Fed Chairmen are more 'political' than many realise. Greenspan met a steady stream of politicians and White House officials during his reign. The Financial Markets Center have just published a piece on what they call the Fed Chairman’s Daybook, based on the work of the indefatigable Wharton finance professor Ken Thomas:

Over the years, Fed chairmen have maintained a detailed log of their meetings with members of Congress and the executive branch.  Using this data, scholar Ken Thomas has produced a series of reports that offer a unique window on the central bank’s interactions with the rest of government.

The newest installment of Dr. Thomas’ research provides an inside look at new Fed Chairman Ben Bernanke’s dealings with official Washington during his first four months in office. It includes a list of each meeting Dr. Bernanke held with top officials from the White House, Treasury, Congress and other parts of government during this period as well as a Bernanke Political Index derived from that information.

New pages at the FMC site also describe the central bank’s actions to block access to information on Alan Greenspan’s meetings with other government officials during the former chairman’s final seven months in office. In addition: a retrospective look at the Greenspan Political Index (with a guest appearance by the ghost of Arthur Burns).

On Bernanke's performace to date, Thomas concludes:

In terms of their frequency, Bernanke’s White House meetings in this period are consistent with Greenspan’s seemingly apolitical pattern during President Clinton’s second term. Also, eight of Bernanke’s nine White House meetings were with NEC or CEA principals, rather than Greenspan-style private meetings with top White House or Cabinet officials.

...Overall, Dr. Bernanke averaged 2.2 political meetings of all types per week for his first four months as Fed chairman. This number slightly exceeds the 2.0 average Greenspan recorded during 1996-2000 but significantly lags the 3.1 average he registered from 2001 through mid-year 2005.

Based on these initial data, it appears that Chairman Bernanke has begun his term honoring the notion of Fed independence by limiting the scale of his interactions with political figures. Hopefully, subsequent data will continue to reflect this relatively apolitical approach.

A US-Europe free trade zone?

It may not come to anything, but certainly worth watching as a possible move by the developed world against China and other developing exporters. The German government is pushing for a US-Europe free trade zone. Bertrand Benoit in Berlin reports Germany eyes free-trade zone to rival China

Spurred by concern about China’s growing economic might, Germany is considering a plan for a free-trade zone between Europe and the US.

A senior aide to Angela Merkel said the chancellor was “interested” in promoting the idea as long as such a zone did not create “a fortress” but rather “a tool” to encourage free trade globally, “which she is persuaded is a condition of Germany’s future prosperity”.

Separately, on Friday, the US, Canada and the European Union complained to the World Trade Organisation about China’s tariffs on car parts, raising the prospect of Beijing facing its first WTO dispute.

The three said they had lost patience with Beijing’s refusal to further open the $19bn-a-year market.

News that the free trade zone, last pursued by Sir Leon Brittan, when European trade commissioner in 1998, is being debated in the German chancellery testifies to the rapprochement between Washington and Berlin since Ms Merkel’s election last November.

This convergence of views was underlined this week when Wen Jiabao, Chinese premier, was politely chided by Ms Merkel for China’s poor human rights record and recent restrictions on foreign news agencies, during an official visit to Berlin.

As German perceptions of China have grown more American, Washington’s approach has shifted too. Speaking before his first trip to Beijing, Hank Paulson, US Treasury secretary, this week outlined a more balanced policy mixing traditional US criticism with praise for China’s reforms.

Ms Merkel’s aide said it was “far too early” to tell whether the project of a transatlantic free-trade zone would be part of Germany’s priorities when it assumes the six-month presidency of the European Union and chairs the G8 group of leading industrial nations from January.

The decline of the middle class?

Just how is the middle class faring in the modern American economy, and how should progressives tailor their message and program accordingly? The editors of American Prospect magazine have been running a series of posts on their website this week under the banner Debating the Middle:

What's (Not) the Matter With the Middle Class? by Stephen Rose
A Democratic message of misery is wrong for middle-income voters. Rather than documenting how the middle class is falling behind (it isn't), progressives might do better finding ways to help more middle-class families succeed.

Populist Persuasion by Lawrence Mishel
Rose does not believe a populist economic agenda is warranted or is useful for attracting middle-class voters to the Democrats. That's a shame. The vast working and middle classes in America have not fared well over the last six years, and Democrats should hardly pretend otherwise.

Another Year, Another Wage Loss by Robert Kuttner
Americans suffers not just from reduced economic opportunity but from diminished political imagination as well.

Don't Look Back by Matthew Yglesias
Is the middle class worse off now than it was thirty years ago? That's the wrong question, and the wrong debate for progressives to be having.

Guess What? There's Reason for Gloom by Jeff Madrick
Steve Rose is a good friend; I have quoted him in my own writing. But his interpretation of income data requires a serious rebuttal. His interpretation is disturbingly misleading.

The Real Issue Is Risk, by Jacob S. Hacker (a shorter version of his post below)
Political candidates and leaders should, first and foremost, offer a message of truth. And the truth is that, after a generation in which more and more economic risks have been shifted onto the shoulders of hardworking middle-class Americans, the middle class is insecure and in need of a serious agenda of economic change.

Walk and Chew Gum at the Same Time, by Jason Furman
Damn Matthew Yglesias. Somehow he hacked into my computer and stole my argument on the Rose-Mishel debate - before I had even written it. Damn he’s good.

Bad Times, Bad Policies, by Dean Baker
Steve Rose's tale of good times for the middle class sounds like something from at least another country, if not another planet.There is no reason that we should give in to the soft bigotry of incredibly low expectations.

Both-And, Not Either-Or, by Ruy Teixeira
I commend Rose and his colleagues for forcefully raising the importance of optimism and economic opportunity to the Democratic economic message. They are right that a "message of misery" - if one was indeed on offer - would not work. But their approach is also too one-sided.

Likewise, the September 2006 issue of The Democratic Strategist carries "an important discussion on the Democratic middle-class economic agenda:"

Message of Misery, by Anne Kim, Adam Solomon, and Jim Kessler
$23,700. That is the household income level at which a white person became more likely to vote for a Republican over a Democrat in congressional races in 2004. That's $5,000 above the poverty line for a family of four, less than half the median income of the typical voting household of all races, and an emphatic repudiation of all things Democratic among the white middle class. Obtaining a sustainable Democratic majority in either house will be impossible unless there is a significant change in this economic tipping point.

Truth-Telling, Populism and Inspirational Politics, by John Halpin
The Third Way authors provide a useful service in pointing out a problem that many progressive activists frequently fail to recognize. A political message that essentially says, "Here are 50 reasons why your life sucks," is not a compelling way to attract anyone to the progressive cause let alone reach the all important middle-class voters who have abandoned the Democratic Party in droves. Barring severe or sharp economic decline, attempts to browbeat people with negative statistics and a barrage of scary anecdotes will almost always lose out at the national level to a more hopeful and optimistic vision.

A Happy Face Isn't Enough, by Elizabeth Warren
Without middle class support, no political party can remain in power. The trio of Kim, Solomon and Kessler has this right. The message should be tattooed on the inside of the eyelids of every office seeker in America.

Time to Move beyond the Clinton Playbook: Don't Neglect Economic Security, by William A. Galston
I agree with much of this memo. The Democrats do have a big problem with middle-class Americans, starting (but not ending) with white voters. Optimism sells better than pessimism.

Message of Truth: Security and Opportunity Go Hand-in-Hand, by Jacob S. Hacker
Having just finished a book entitled The Great Risk Shift: The Assault on American Jobs, Families, Health Care, and Retirement-And How You Can Fight Back, I would guess that Anne Kim, Adam Solomon, and Jim Kessler (hereafter "KSK") will accuse me of peddling a "message of misery."

Will the Real Middle Class Please Stand Up, by Ruy Teixeira
Let me begin on a note of agreement with Kim, Solomon and Kessler (KSK): the Democrats have a very large problem with middle-class voters, particularly white middle-class voters. And crafting a potent economic message is key to reaching these voters. A better national security message and/or reassuring these voters on values issue will not be enough to enlist a critical mass of these voters in the Democratic camp.

See the discussion over at Mark Thoma's post The Middle Class Risk-Return Tradeoff. He cites his earlier post Is Worker Insecurity a Myth?, which is also worth reading.

Reflections on America

Stein Ringen reviews Claus Offe's new book in the latest Times Literary Supplement: The American seen. The book, Reflections on America: Tocqueville, Weber and Adorno in the United States, is published by Polity Press. These remarks caught my eye:

Tocqueville’s, Weber’s and Adorno’s reflections abound with questions that have lost none of their relevance. What is the destiny of freedom and is it better protected in the American or the European social model? Are we excessive in our demand for equality, and if so what follows? The state is both necessary for and dangerous to freedom; how do we find the balance? Is culture, now a huge sector of economic growth, an industry of manipulation? Is there a social architecture between the individual and the state or was Margaret Thatcher right that there is no such thing as society?

If anything, the European–American comparison seems to me to have become more relevant. Europe has put behind it the transition to democracy that Tocqueville correctly saw would be difficult, and is now an equal partner with America in the great drama of liberty. Europe has not been “Americanized” except superficially, and is competing with America with a distinct social model.

Plain speaking Stiglitz

Today's Telegraph features a long profile of Joseph Stiglitz by Edmund Conway: The world needs to do more to support the poor. Some quotes:

On the US economy: "The US is borrowing from abroad $2bn-3bn a day, and lectures people on what is sound economic policy. So there is absolutely no doubt that the level of credibility of what the US says is zero."

On Iraq: "The only winners in this are the oil companies and Halliburton. The cynical view is that the war was fought not to secure oil supply but to get the price of oil high, to benefit Bush's oil friends. Though that attributes to malevolence what probably should be attributed to incompetence."

On the International Monetary Fund's management of Russia's transition from     communism to a market economy: "No one could have claimed this was a success. The way it was managed did nothing but increase poverty and lower income."

On resistance to     globalisation: "Some economists ask why it is that people are     better off and don't realise it. The fact is they're not better off." As you might have guessed from his book titles, he devotes most of his time to the last of these topics.

Stiglitz is promoting his new book, Making Globalization Work. Conway says it "amounts to the perfect covering letter for a Democratic White House job application". So, would he work for a Hillary if she became President? You bet:

"It's very hard to say no when the President asks," he chuckles. "That is one of the powers of the Presidency - that you can get almost anybody," he says, before adding swiftly: "I have no idea if it will happen."

UPDATE: The Economist is no great fan of the book. It concludes its review rather archly:

But if the writing is crisp, the arguments are a little soggy. Mr Stiglitz assumes the worst of markets, the best of governments—except, of course, his own. Too often, he wants to have it both ways: his distaste for the IMF has made him suspicious of all technocratic bodies, even to the point where he questions the case for independent central banks. But at the same time he wants to set up international tribunals to rule on unfair tax competition, for example, or health standards. He says that debt relief for the poorest countries is “simply a matter of accounting”, because they could not repay anyway. But he also wants to argue that the burden of red ink has crippled them.

...“Making Globalisation Work” is not a bad book but it arrives after books that are better. Jagdish Bhagwati's arguments are more convincing (“In Defence of Globalisation”), Paul Blustein's reporting is more reliable (“And the Money Kept Rolling In and Out”) and Martin Wolf provides a better guide to the economic research (“Why Globalisation Works”). That Mr Stiglitz, a great and original theorist, should spend his time writing a “me-too” globalisation book rather proves his point that markets sometimes misallocate resources.

The Debate Over Inequality

by Mark Thoma

Well, me versus Samwick, Mankiw, and DeLong seems like a difficult match to win, but I am going to persist anyway. Stay the course so to speak (see also the Paul Krugman column that is at issue, an earlier post by Andrew Samwick, my response to Andrew, and a follow-up at Angry Bear). Each is objecting to Paul Krugman's claim that government policies can change income inequality and that changes in political ideology can explain, in part, variations in income inequality over time.

I hope to have more to say later, but for now let me offer a bit of evidence from Australia through Andrew Leigh, and add a bit more on the US as well. First, here's Andrew Leigh:

Top Floor, Going Up, by Andrew Leigh: An updated version of my research with Tony Atkinson on top incomes is written up by John Garnaut in the SMH today. There’s not much there to surprise regular readers of tbis blog. But since it’s not every day that I crack the front page of the SMH, I thought I’d indulge in some shameless self-promotion.

Here's the abstract from the article (PDF). It's also written up in the Sydney Morning Herald, as noted by Andrew:

ABSTRACT Using taxation statistics, we estimate the income share held by top income groups in Australia over the period 1921-2002. We find that the income share of the richest fell from the 1920s until the mid-1940s, rose briefly in the post-war decade, and then declined until the early-1980s. During the 1980s and 1990s, top income shares rose rapidly. At the start of the twenty-first century, the income share of the richest was higher than it had been at any point in the previous fifty years. Among top income groups, recent decades have also seen a rise in the share of top income accruing to the super-rich. Trends in top income shares are similar to those observed among other elite groups, such as judges, politicians, top bureaucrats and CEOs. We speculate that changes in top income shares may have been affected by top marginal tax rates, skill-biased technological change, social norms about inequality, and the internationalisation of the market for English-speaking CEOs.

Factors like top marginal income tax rates and social norms are connected to the political environment, but of course, this is in no way conclusive. A lot of the change is driven, according to their results, by the incomes of CEOs. But I think it's at least suggestive that the political environment drove some of the change.

For the US, as passed along to me in an email, factors such as the New Deal's very large tax increases on the wealthy, both directly on income and indirectly on corporate profits are an important factor connected to the political environment at the time. It's an open question how much of the change in inequality that might explain by itself.

Unions are also worth taking seriously with union membership nearly tripling to about a third of the workforce from the mid 1930s to the mid 1940s. This would affect all wages, not just those in sectors where unions are prevalent. The decline of unionization after the 70s is also a factor to consider, and there's a strong case to be made that this was made possible by a political environment that allowed union busting to occur. In any case, I don't think this is a settled question and I hope to follow up with more later. [dual posted]

Update: Please see Brad DeLong's excellent summary and follow-up on this debate.

Political Tribalism

by Mark Thoma

Chris Dillow at Stumbling and Mumbling is disappointed at the state of political debate:

Deepak Lal's Reviving the Invisible Hand: a review, Chris Dillow: There's very little political debate these days. Most people merely talk to their own tribe of converts. If they recognize an opposing position at all, it's only as a target of cheap abuse.

Deepak Lal has fallen into this bad practice in his Reviving the Invisible Hand. His aim is a noble one - to restate the case for classical Smithian liberalism against the anti-globalization movement. The trouble is, he fails.

The challenge for classical liberals is to justify free markets to those who fear they will lose from them. And - contrary to Tim's claim - markets do create losers, if only temporarily, simply because ... they throw people out of work. What does Lal say to these? This (p232):

As the northern losers in the new liberal interational economic order are the unskilled, there is a simple means for them to maintain and raise their incomes: go to school.

This is great advice for a 10 year old. But it's just ridiculous for a 50-year-old. Lal also opposes redistribution to maintain the incomes of the poor (p189):

Unless the coercive power [to levy redistributive taxes] is voluntarily and unanimously given by free agents to the State, its exercise would be unjust.

He's speaking here of justice in the sense of ensuring people have liberties (Lal is dismissive of "rights") to do as they will. What he never answers is the question which the poor might ask: "why should your conception of justice - which is only one of many - trump my need to continue living?"

And why are the poor poor? Lal has the decency to acknowledge that in some (many?) cases, it's because they are victims of past thefts of land. But he denies - as Robert Nozick did not - that they are entitled to rectification (p186):

Though the claim may be morally just, ... most societies throughout history have recognized the chaos that would be caused by seeking to redress any fault in the historical descent of every current title to property...

Well, this is a good game, isn't it? When the poor claim an income on grounds of expediency, justice triumphs. And when they claim it on the grounds of justice, expediency wins. Cynics will say Lal is merely defending existing inequalities and speaking only to the winners. And they've other evidence for this...

What Lal seems to be doing here is speaking only to the converted. This will get him an appreciative audience. But it will not advance the classical liberal case one jot.

I find all this tribalism especially depressing because Lal makes so many good points. His analysis of the gains from trade, the misuse of global poverty statistics, climate change and the influence of NGOs are all valuable. Sadly, though, liberalism's opponents will regard these not on their own merits, but merely as defences of existing inequalities.

If liberalism is to triumph - and I hope it does - its advocates will have to convince egalitarians. Lal fails to do this.

I'd be curious to know if you feel the "state of political debate" is better in the UK than in the US. Also, to follow up on the point that globalization produces both winners and losers, see Baumol's "Errors in Economics and Their Consequences" posted here a couple of weeks ago.

Do immigrants reduce wages?

The surge in US immigration in recent decades has seen debate about the economic effects of immigrants on US natives, particularly on their wages, gain momentum. Tomorrow sees a noteworthy paper on the topic delivered at the NBER's International Trade and Investment Workshop. - part of week 4 of the NBER Summer Institute.

Università di Bologna's Gianmarco Ottaviano and Giovanni Peri from UC Davis have a topical new paper entitled Rethinking the Effects of Immigration on Wages (PDF). Unlike some of the other recent studies, they find a positive effect on wages of US-born workers. Here is the abstract:

This paper revisits the following important question: what is the effect of immigration on average and individual wages of U.S.-born workers? In particular we analyze the impact of surging immigration, on average real wages and on the increased wage dispersion during the period 1990-2004. Building on Borjas (2003) we emphasize the need for a general equilibrium approach to analyze this problem.

The impact of immigrants on wages of US born workers can be evaluated only by accounting carefully for labor market and capital market interactions in production. This requires to assume a production function, a mechanisms of physical capital accumulation and to derive labor demands for different types of workers (by education and experience). The usual ”reduced form” approach estimates the effect of immigrants on wages of US-born workers within the same skill group. Such method only provides estimates of a partial effect, usually negative and uninformative of the total effect of immigration on wages.

Using our general equilibrium approach we estimate that physical capital adjust promptly and fully to immigration (already within one year) and that immigrants are imperfect substitutes for US-born workers within the same education and experience group (because they choose different occupations and have different skills).

These two facts, overlooked by the previous literature, imply a positive and significant efect of immigration on the average wage of U.S.-born workers, already in the short run. They also imply a small negative effect of immigration on wages of uneducated US born workers and a positive wage effect on all other US-born workers. Hence only a very small fraction of the increase in College/High School Dropout wage gap during the 1990-2004 period can be attributed to immigration.

Global labour market imbalances?

What effect is globalisation having on US labour markets? Is there a 'global glut of labour' alongside Bernanke's global savings glut? These issues were addressed in a paper given last month to a Boston Fed conference, Global Imbalances – As Giants Evolve by the NBER's Richard Freeman: Labor Market Imbalances: Shortages, or Surpluses, or Fish Stories? (PDF).

The paper got some attention at the time, but its worth another spin around the block. Freeman raises in his characteristically provocative way several fundamental issues for economists, pundits and politicians. He puts forward "two competing narratives about the how the labor market in the US will develop over the next decade or two":

The Impending Shortage narrative, which has attracted attention from business and policy groups, is that the retirement of baby boomers will create a great labor shortage. Slower growth of new entrants from colleges and universities, an increased proportion of young workers from minority groups, and inadequate training in science and math will produce a shortage of the skills the country needs to maintain itself as the leading economy in the world. The message to policy makers is to forget about the sluggish real wage growth of the past three decades, the deterioration in pensions and employer provided health care, and fears of job loss from offshoring or low wage imports. Instead policy should focus on helping business find workers in the coming shortage.

...The Globalization Surplus narrative, which has attracted attention as part of discussions of the current mode of globalization, takes the opposite tack. It holds that the spread of global capitalism around the world, particularly to China and India, has generated a labor surplus that threatens wages in advanced and higher wage developing countries. Trade, offshoring, global sourcing of jobs, and flows of capital to the low wage giants combine to reduce the demand for workers in manufacturing and tradable
services in advanced countries and in moderate income developing countries.

Freeman finds stronger support for the second thesis than the first.

I conclude that the forces of globalization associated with the doubling of the global work force will trump demographic developments associated with slower population growth in determining supply/demand balances in the labor market.

This process could take a long time:

How long might it take the global economy “absorb” the huge work forces of China, India, and potentially other developing countries? ...If China maintains its successful development and wages double every decade, as they did in the 1990s, Chinese wages would approach levels in the advanced countries today in about 30 years. India would take longer. My assessment is thus that the transition will take 40 to 50 years.

What about other workers? Freeman notes that although globalisation "has improved the economic position of workers in China and India", workers in many other developing countries "have not done well in the 1990s-early 2000s". And those of us working in the OECD countries?

How workers in the advanced countries will fare in the transition depends upon a race between the improvements in global productivity and reductions in prices that the new giants will bring to the world economy vs the labor market pressure for wage concessions to compete with them. Ideally, the increased number of scientists and engineers and spread of high tech worldwide will accelerate the rate of technological advance enough to raise living standards in all countries; the US and other advanced countries will retain comparative advantage in enough leading sectors to remain hubs in the global development of technology; and the world savings rate will rise so that the global capital labor ratio increases rapidly.

What are the implications for government policy? For Freeman, it is two-fold: to ensure a smooth transition, and tilt the balance more towards labour than capital:

If I am right, the overriding goal of labor market policy around the world in the next decade or so should be to assure that the absorption of China, India, and the ex Soviet bloc into world capitalism goes as smoothly as possible.

The bent of policy in the US and elsewhere should be in the direction of favoring labor rather than capital, which ought to be able to take care of itself in a global economy with twice as many workers, many available at low wages.

There should be sustained international pressure on developing countries to raise their labor standards and to distribute the benefits of growth to workers. And there should be efforts to maintain or improve living standards if not wages of all workers in the advanced countries so that even the less skilled gain some from the movement to a global labor market.

Unorthodox thinking from the head of the NBER Labor Studies programme! And there's more: